Analysis: In battle for the car, Sirius faces fight from Pandora

January 10, 2013|Jennifer Saba and Liana B. Baker | Reuters

(Justin Sullivan/ Getty Images photo)

NEW YORK (Reuters) - Sirius XM Radio Inc's grip on drivers is under an increasing threat as the availability of Internet connections in more cars is helping Pandora Media Inc counter some of its rival's big selling points.

In a sign of how important drivers are to the two companies, each of their top executives made the trek to Las Vegas this week to court automakers at the annual Consumer Electronics Show.

Sirius XM, which has its satellite radios in 70 percent of new vehicles, generates the vast majority of its revenue through subscriptions and derives only a fraction from advertising dollars. Streaming service Pandora is just the opposite, collecting most of its revenue from advertising and operating only a nascent subscription business.

Right now, Sirius XM is the much bigger company, with almost 24 million subscribers and more than $3 billion in annual revenue. In the third quarter, it generated average revenue of $12.14 per subscriber.

Pandora, by contrast has 60 million users, about 1 million of whom are paid subscribers, and is on track to generate $424 million in revenue this year.

But the migration of music audiences to mobile devices threatens to upend a market that Sirius current dominates. The key to both companies' futures rests on winning the battle for the listener on the go, particularly people traveling by car.

With its presence in new vehicles, Sirius XM has a first-mover advantage over Pandora. But Pandora is making a huge push to get into the car, a move that dovetails with ubiquitous wireless access that makes it easier to listen to its service.

"Internet-enabled radio in the car has already begun," Pandora Chief Executive Officer Joe Kennedy said in an interview. "It will grow as a snowball, initially small but growing exponentially."

Sirius XM declined to make its executives available for interviews.

Of Pandora's 60 million total listeners, 77 percent have tuned in with a mobile device. The problem is, the revenue per 1,000 listener hours on mobile was only $26.96 in the third quarter, up from $23.60 a year earlier, but still less than half of the $56.40 the company generated from other listeners.

"They do have to continue their mobile monetization," said Cowen and Co analyst John Blackledge, who has a "neutral" rating on the stock.

Kennedy called the third quarter a "key milestone" since the mobile revenue increase outpaced mobile usage growth.

At Sirius XM, executives have said its customers are increasingly listening to its service on mobile devices, but it has never broken out figures on that usage. It costs Sirius XM car subscribers an extra $3.50 a month to stream the service over the Internet on devices.

Sirius XM Chief Financial Officer David Frear said at an investor conference on Wednesday that the strategy was "to capture you in the car and then allow you to extend to other platforms."

DASH FOR THE DASHBOARD

While Sirius XM touts the ability of its satellites to deliver a strong signal and high audio quality, the importance of those attributes is likely to fade because of the widespread availability of faster and better Internet connections in cars.

"From the consumer standpoint, the reception advantages of satellite radio will be marginalized or go away over time," said a former Sirius XM executive familiar with the business models of the company and its competitors.

Indeed, Liberty Media Corp, which ranks as Sirius XM's largest shareholder and is close to gaining operating control of the company, has criticized its former longtime CEO, Mel Karmazin, for not adapting to changing technologies fast enough.

Critics say Sirius XM has relied too heavily on its position in the auto market and perceived programming advantage. About 50 million cars in the United States come equipped with the satellite radios, with just under half of their owners actually subscribing to the service.

For its part, Pandora is available in just 75 vehicle models, although it also has deals with automakers like General Motors Co, Ford Motor Co, BMW and most recently Chrysler Group LLC that allow drivers to plug in their Pandora-enabled mobile devices and use the car's dashboard to control the service.

More than 1 million people have used Pandora's dashboard integration, Pandora said.

Sirius XM also believes it has an edge with its programming from the likes of shock jock Howard Stern, talk show host Oprah Winfrey and major sports leagues. Access to this type of content, Sirius contends, justifies the subscription cost of at least $14.49 per month.

In the first three quarters of the year, Sirius XM's programming and content costs were $205.2 million, while it paid $409.4 million in revenue sharing and royalties, the company has reported. This represents roughly 25 percent of its revenue in the period.